Czech Republic

Investment opportunities
in the Czech Republic

The Czech Republic – a member of the EU, OECD, NATO, WTO, IMF and EBRD – is an open market economy, a parliamentary democracy and one of the economically most successful post-transition countries. The country’s stable economic environment, skilled workforce and central location within the single European market also make it a very attractive investment destination. The total inflow of foreign direct investment (FDI) into the Czech Republic from 1993 to the present amounts to more than E50 billion. In terms of per capita inflow of FDI the Czech Republic has been among the most successful Central European countries over the past six years. According to research conducted by Ernst & Young, the Czech Republic is the world’s seventh most attractive country for investors. The research further indicates that Europe primarily receives investment in the automotive industry and high technology. The structure of investments that are currently coming to the Czech Republic is in line with this trend.

Who Invests ?

Traditionally, most investors entering the Czech Republic have been from Germany. The reasons for this are obvious: historical, cultural and geographic proximity supported by references or the investors’ own experience, as well as by the country’s substantially lower wage costs. Immediately behind the Germans on CzechInvest’s ranking are firms from the Czech Republic, followed by the United States and Japan in third and fourth place, respectively.

And where ?

Besides the automotive sector, which has traditionally been the strongest area in terms of foreign direct investment, most projects are in the electronics, chemicals and plastics industries. Life sciences, microelectronics, aerospace and high-tech engineering are priority sectors with significant development potential.

Auto manufacture is just one example of a sector where the Czech Republic excels

 

Advanced Technologies

Historically, production investments were logically the first to be located in the Czech Republic. In recent years, however, there has been a shift from production to investments with higher added value. Purely assembly types of production have mostly been transferred to the east, where wage costs and protection of workers, as well as skills, are at a lower level. Far more interest is being shown in the Czech Republic by investors producing high-tech products (aircraft, pharmaceuticals, computers and office machines, electronics and communications equipment, measuring instruments, etc.), ie products that demand a high level of science and research, and thus an educated and skilled workforce. Companies such as Miele, AEG, Bang & Olufsen, Baxter, Black & Decker, Laird Technologies, Osram, Matsushita (Panasonic), Siemens, Zexel Valeo, Saint Gobain and a range of others are investing in projects of this kind.

Business Support

A significant trend over the past several years is investments in centers providing business support services. This primarily concerns shared services (centralization of financial, HR and IT operations from numerous branches into one center, which subsequently serves all existing branches with the purpose of reducing costs and increasing overall efficiency), multi-lingual customer service centers, high-tech repair centers, softwaredevelopment centers and expert solution centers. For example, the American company Computer Associates International operates a software-development center in the Czech Republic, and was joined here by Microsoft in 2006. Accenture and ExxonMobil have shared-services centers in the Czech Republic. Team Trackers, ICON Communication Centre, Lufthansa and GE Money have also set up customer service centers in the country. IBM and DHL are among the companies with projects involving ICT expert solution centers. In the area of high-tech repair centers, we can mention the investments of Symbol Technologies and Olympus.

The Czech Republic has the advantage that it does not rely on only one city (or region) to attract the attention of investors. This would sooner or later result in excessive pressure on projects and wage growth. Favorable conditions are offered by a variety of locations, especially by university cities such as Brno, Ostrava, Olomouc and Plzen, where firms can select from a large number of university graduates. The Czech Republic’s position has been recognized by international studies. A.T. Kearney’s Offshore Location Attractiveness Index ranks the Czech Republic fourth in the world and first in Europe in terms of attractiveness for foreign investors operations in the business support services market.

R & D

The Czech Republic has also had substantial success in attracting projects leading to the establishment of technology centers focused on applied research and innovation. This is a sector that has experienced year-on-year growth. In 2006, 15 foreign companies decided to establish research and development centers here, as opposed to 12 in 2005. In most cases, companies originally invest in production. On gaining positive experience here they are increasingly deciding to establish technology centers as well. A positive development is that companies which do not have any production operations here, such as Ricardo and Roper Industries, are beginning to set up technology centers in the Czech Republic.

Among the most significant technology centers in the country are those of Honeywell, ON Semiconductor, Siemens, Bosch, Tyco, Ingersoll Rand, Latecoere, Lonza, Inter Informatics, Value Engineering, Rieter CZ, Matsushita (Panasonic), Skoda Auto and a range of others. Investments in technology centers and business support services steadily comprise approximately one-third of investment projects in the Czech Republic. Projects involving technology centers also most closely correspond to the competitive advantage that the Czech Republic has as opposed to other countries in the region and farther east. We occasionally hear from foreign investors that when the Czech ability to find technically innovative solutions is matched with, for example, German precision, the results are outstanding. The success of Skoda, Siemens, Bosch and Mercedes-Benz, all of which operate technology centers in the Czech Republic, is often attributed to this combination of skills.

International Rating

The Czech Republic enjoys one of the highest rating evaluations in Central and Eastern Europe. The company has received the grade of A1 from Moody’s and A- from Standard and Poor’s. The country’s long-term foreign-currency obligations rating increased from A- to A, whereas long-term debt in Czech crowns increased from A to A+. The short-term currency rating jumped from F1 to F2 and the state’s rating ceiling reached AA-, up from A+. The outlook for all ratings is stable.

What the Czech Republic can offer Investors

First, we must emphasize that the Czech Republic does not compete with other countries for investments solely on the basis of low wage costs. These are, and will continue to be, lower than those in Western Europe (currently around 40% of the EU average). Nevertheless, low wage costs do not represent the country’s main competitive advantage, unlike countries in Eastern Europe and Asia.

Geographic Position

A key factor in the Czech Republic’s attractiveness to investors is the country’s geographic position. For suppliers to Western Europe, tough competition dictates that it is absolutely necesssary to deliver goods and services within a few days or even hours, which is not possible for more distant countries. Since the Czech Republic’s accession to the European Union, foreign investors can supply one of the world’s largest markets directly and without any barriers. Furthermore, foreign companies in the CR can make use of Czech entities’ previously established contacts with partners in former Soviet republics as well as their long experience with operating in the markets there.

An Industrial Tradition

The Czech Republic has a well-known industrial tradition. The country has a long-standing and quality background of vocational and university education, giving investors the assurance of a skilled workforce at all levels within a short timeframe. In countries competing for foreign investments, a supply of educated and skilled workers is absolutely vital. The Czech Republic has long possessed a well-established system of vocational education founded on a broad spectrum of specialised three and four-year schools. The immediate availability of technically educated graduates of these institutions at a fraction of the price of western labor creates excellent conditions for manufacturing companies.

Infrastructure

Another of the Czech Republic’s important attributes is the quality and density of its infrastructure. This refers not only to roads and highways, but also to telecommunications and developed IT infrastructure. The technological level of the Czech Republic was a decisive factor for the projects of SAP and DHL, for example. The Czech Republic sits at the crossroads of the main European transit corridors. In addition, the country’s accessibility by air is excellent, as air transport is not concentrated only in the capital, and it is possible to travel to practically any destination in the Czech Republic within two hours of landing.

Though wages do not constitute our dominant competitive advantage, they are not a negligible factor. Thanks to the combination of relatively low labor costs and the number of hours that Czechs spend at work, the Czech Republic remains alluring for production-type investments.

Industrial Property

CzechInvest, which is engaged in supporting construction and regeneration of industrial properties for investors in the Czech Republic, supported a total of 92 industrial-zone construction projects covering approximately 2,150 hectares between 1998 and 2005. In coming years, it will be possible to obtain grants from structural funds for the renovation of old industrial properties.

Dependable Suppliers

Due to its quality, variety and size, the Czech Republic’s supplier base is undoubtedly one of the country’s leading competitive advantages. Among other things, CzechInvest ensures the establishment of contacts between Czech suppliers and foreign investors through a number of means. The agency administers an extensive online database of proven suppliers, many of which already co-operate with foreign partners in the Czech Republic, and also organizes so-called reverse exhibitions at which Czech companies exhibit and foreign investors and visitors determine which exhibitors best meet their needs.

Investment Support

The Czech Republic provides the following types of investment incentives:

• Income-tax relief;
• Transfer of technically equipped land for favorable prices;
• Tangible support for creation of new jobs;
• Tangible support for training and retraining of employees;
• Transfer of land registered in the property register as agricultural land and transfer of other types of land.

Both Czech and foreign legal entities can apply for investment incentives in the Czech Republic under the same conditions, provided the general and specific conditions set forth by specific acts are met. The general conditions include, among other things, the requirement that the party interested in investment incentives introduces new production or expands or modernizes existing production for the purpose of significantly changing a product or production process. In accordance with the Investment Incentives Act, investment resources must be invested in the manufacturing industry.

A party interested in investment incentives is obligated to acquire machinery to the value of at least 40% of the total value of acquired assets. The total value of acquired long-term tangible and intangible assets must amount to at least CZK200,million (approx. $9.4 million), whereas the amount of at least CZK100,million (approx. $4.7 million) must be covered from the interested party’s own capital. The values stated above can be reduced – down to CZK100,million for long-term tangible and intangible assets; CZK50,million from the applicant’s own capital – depending on the rate of unemployment in the region in which the investment is implemented. (According to the prepared amendment to the Investment Incentives Act, the amount of the required investment should be reduced by half, whereas the proportion of the cost of machinery in the total investment should rise to 60%.)

Political Stability

The Czech Republic’s political situation is fully in line with the principles of the market economy and its development is predictable. Power shifts between center-right and center-left political parties, which have the possibility to govern in coalition groupings. Although from the intra-republic standpoint this concerns a situation inhibiting the effectiveness of government, it does not represent a significant risk for investors. In fact, it could be said that the opposite is true. Investors needn’t be concerned about extremist parties assuming power, and thus they can depend on the security of their investments in the country. This assurance is reinforced by the Czech Republic’s membership of the international organization for the protection of investments, MIGA (Multilateral Investment Guarantee Agency) under the World Bank-IMF group.

The Czech Republic is also a signatory of a range of bilateral international agreements on the support and protection of foreign investments, which obligate participating countries to treat the investments of non-residents in the same manner as those of residents and to guarantee them the full protection and security of the law. The Czech Republic is party to such agreements with, for example, the United States, Germany, Great Britain, France, Switzerland, Italy, Belgium, Luxembourg, the Netherlands, Finland, Norway and Denmark.

About Czech Invest

CzechInvest, the Investment and Business Development Agency, is an agency of the Ministry of Industry and Trade of the Czech Republic whose services and development programs contribute to attracting foreign investment and promoting the development of Czech companies and the country’s business environment, and are free of charge. The main objective of CzechInvest is to advise and support existing and new entrepreneurs and foreign investors in the Czech Republic. The agency also promotes the country abroad and acts as an intermediary between the EU and small and medium-sized enterprises in utilizing EU Structural Funds in the Czech Republic.

In order to facilitate contacts with foreign investors, CzechInvest has eight branch offices around the world – Brussels, Cologne, London, Paris, Hong Kong, Yokohama, and two in the United States (Campbell, CA; Chicago, IL). With the aim of being as near as possible to its existing and potential clients within the Czech Republic, the agency also operates 13 regional offices.

Contact details:
USA – West Mr. Radomil Novak
California@czechinvest.org
Tel: +1 408 376 45 55
Fax: +1 408 376 45 57
51 East Campbell Avenue,
Suite 107-F Campbell. CA 95008

USA – East Mr. Bohuslav Frelich
chicago@czechinvest.org
tel: +1-312-2450180
fax: +1-312-2450183 222

Website: www.czechinvest.org
Merchandise Mart Plaza, Suite 938
Chicago, IL 60654

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